March 2016

Francis: We’re joined from Winnipeg by Rob Tetrault. He’s the Portfolio Manager at National Bank Financial. A lot of unanswered questions it seems on the conference calls so far, Rob. I want to get to a lot of things, but I want to get to the heart of the balance sheet if I could first. A lot of portfolio managers focus on the balance sheet and the risks associated with it, seeing a lot of discussion about convenance and, you know, defaults and waiting for the 10k. Let’s talk about those risks, first, if we can with you. How risky is this company financially?

Rob: Well, first of all, thanks for having me, Francis on this wonderful rainy morning in Winnipeg. It is risky. I was on this show a couple of times in December and January. Your host asked me this exact same question and I’m going to answer the same thing I said then. I said, “It’s too risky for me. There are too many unknowns and I want answers before myself or my clients are going to get into the stock.” That was at $140. What we’re seeing now is the culmination of that or maybe not even the culmination of that. So, yes, it is risky. Specifically for me, the big issues are, the SCC potential investigation, what’s Hillary going to do with them? Why are they not reporting GAAP yet? And their earnings, actually. So I have quite a few issues with the stock at this point.

Francis: Let’s talk about the outlook that the company has provided this morning. I think people might put an asterisk beside it because of those risks and the lack maybe of information coming out of the call, but pretty nasty haircut to both the revenue line and the profit line. What do you think of the numbers?

Rob: Well, I guess again I’m not surprised. At least they are reporting numbers. That’s a minor positive you could say. Now what are they reporting is the other issue. I want to see some sort of clean break and we’re moving forward with a specific fully transparent strategy. And I think that needs to happen, because we’re in the dark again. And I know we’re talking about a month or two before we get that, but as investors, we need to know what’s happening with this company like we do with every other company, and we don’t have that yet. So again, you’re talking about a 5- 5 ½ multiple. Are those numbers real? What kind of losses are we going to see provisionally? How is the revenue going to be impacted by this Walgreen’s deal? To me, if you’re thinking of getting this in the stock, you’d better believe that the CEO and the board have a pretty darn good handle on all those issues if you’re getting into the stock.

Francis: Do you believe that Michael Pearson has a good handle on these issues?

Rob: Really tough to tell. He had that pneumonia bout and hasn’t been around. He missed a good 2 months there. And he’s now walking in and the first thing he says is, “We’ve got issues. There’s a lot of bad news.” It’s not exactly a resounding, you know, confidence that we’re seeing from the CEO, and this call this morning that I’m missing now, because of this, but it’s going to be interesting to hear and to see how we react to that. Now we’re an hour or two and I’m guessing he’s getting grilled by all the analysts and I’m guessing it’s not going pretty right now. So, do I have confidence? I don’t fully. I need to see a little bit more from that CEO and I personally again am not getting into the stock.

Francis: What about the board? Because there have been some new blood added to the board. It’s a pretty large board. We also have Bill Ackman into the mix. What is your confidence level with the new players on the board, the existing board, and Bill Ackman?

Rob: There’s a little bit more confidence for sure, I’d say. Anytime you’re bringing in hedge fund advisors, sorry, CEOs of hedge funds and hedge fund people on your board, you’ve got to be aware of the potential conflict and how that’s going to run, because what matters to them, obviously might be different than what matters to potential holders. So, you know, on the board itself, I think it’s not a major issue for me at this point. I have other bigger issues as I mentioned, the SEC, Hilary, their reporting, how everything’s going right now, and its problem after problem after problem. And my dad used to tell me, “Where there’s smoke, there’s fire.” So, I’ve been aware of this for awhile and I’m keeping my ears pointed and pierced to make sure that I’m understanding what I think I’m seeing. And until I see something concrete and clear that we are behind this, we’ve passed this, again, I’m not touching this, even out of 5 multiple, because, is that a real 5 multiple?

Francis: Rob, we talked a lot, you mentioned Hillary, the SEC investigation, you’d like to see more transparency with reference to GAAP earnings for example. But do you think, just in terms of your knowledge of the company, that the combination of the assets that the company has, the drugs that they sell, the deal with Walgreen, partition law, maybe you can go through. The various assets are descent assets some would say. Do you think they have the right package of assets if they can clarify all these other issues, which I’m not underestimating?

Rob: For sure. That is my point, if we can clarify these issues. Hey, it was a hundred billion dollar company, right? So I mean, if we can clarify these issues, we can move on. I mean, the revenue, well, I do have some concerns though, like the revenue that they’re getting with Walgreens, clearly that’s going to be, the margins are going to be thinner in my mind. I know it’s a 20 year deal, but what’s going to happen after year 5 when Walgreen comes back and says, “Hey, I want you to trim those prices a bit for me.” or “I want you to trim those margins.” Also, I worry about the new path that they’re going to take with respect to focusing on R&D and less purchasing mature drugs and mature companies and just effectively putting a price bump on that, adding their distribution in there. So, that’s not exactly the same company in my mind. If they do actually go towards this orientation of R&D, I think it’s going to be a different company. And again, they’re going to want to prove themselves for the market to give them a full evaluation of 8, 10 or 12X earnings.

Francis: Rob Tetrault, thank you very much for joining us this morning. Lots to chew on from Valeant, today. Thanks for taking the time from rainy Winnipeg.

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